You think your trust protects your assets from your dearly beloved spouse? Think again! Read what happened to Mark Clayton who relied on trusts to keep his sawmilling fortune safe from his wife!
Facts of Clayton Case
Mark and Melanie Clayton were married in 1989 and separated in 2007 after 17 years of marriage. Prior to their marriage they entered into an agreement (“a pre-nup”) which, among other things, limited Melanie Clayton’s ability to claim a share of certain assets if they separated. During the marriage, Mark Clayton built up a very successful sawmilling and timber business and settled two family trusts which owned that business (the Vaughan Road Property Trust (VRPT) and the Claymark Trust (Claymark)).
When the parties separated, Mark Clayton attempted to use the pre-nup and the trust structure to limit the amount of property which he had to share with Melanie. Not surprisingly Melanie was unhappy with this and sought a share of the assets amassed during their relationship. That dispute made it all the way to this country’s highest court.
Interestingly, despite Mark and Melanie ultimately settling their dispute by agreement, the Supreme Court chose to release its decision in Melanie’s favour to clarify the law in this area. One decision concerned section 182 of the Family Proceedings Act 1980, the other a particular trust set up by Mark.
Judgment of the Supreme Court
In the first of its decisions, which dealt with VRPT, the Supreme Court found that:
• Due to Mr Clayton holding the full “bundle of powers” (ie the power to appoint and remove beneficiaries, the power to appoint and remove trustees and the power to distribute capital etc) it was as if he owned the assets personally.
• This amounted to a property right able to be valued under the Property (Relationships) Act.
• The value of this property right was the net assets of the trust.
In other words, Melanie Clayton would have got half!
With regards to Claymark, the Supreme Court stated that for a claim to succeed under s182 of the Family Proceedings Act 1980 there was a two part test:
1. Was there a nuptial settlement (which the Court will take a very generous approach to) and;
2. In what manner should the Court then exercise its discretion.
The majority of the Court found that:
• there was a nuptial settlement (that the trust was a business trust did not matter);and,
• had the parties not settled, the Court would have ordered that the trust be spilt into two equal shares.
In other words, Melanie Clayton would have got half!
So, what do people in Mark and Melanie Clayton’s position need to know?
In short, if you and/or your spouse have settled a trust during your relationship or have used relationship property to prop up a trust, then the assets held by that trust will likely be shared equally by the court when dividing assets between you and your ex-spouse following a dissolution of your marriage/civil union. In addition the court may direct that some assets be held for the benefit of your children.
This can be avoided with a fair and competently drafted pre-nup or mid-nup agreement.
Take-Aways from Clayton are:
• The courts will take a wide approach as to what qualifies as a nuptial trust.
• Section 182 has no application to de facto couples – only couples whose marriage has been dissolved can qualify or couples in civil union whose relationship has been dissolved can qualify. However, in such cases, section 182 will be a very powerful tool to attack a trust.
• If you have a family trust, you need to take a long hard look at it in light of the state of your relationship and also the health or otherwise of your children’s relationships.
• Claytons case reminds us that it is indeed time for a “spring clean” of trust and property arrangements. You would be well advised to sit down with your lawyer and seek his or her expert advice on the following:
– Whether the clauses, powers and beneficiaries of your existing trust remain appropriate in light of this case and other changes in your life;
– Whether your trust is likely to qualify as a nuptial trust under Clayton, and what implications that could have;
– Remember that even business trusts set up to protect from assets and creditors may well qualify as a nuptial trust;
– Are the powers granted to you under the trust likely to qualify as relationship property as they did in the second Clayton decision;
– What steps could be taken to protect against Clayton-type claims.
• In short, rather than waiting for the bust-up in your own marriage or one of your children’s to occur, you have a window of time to act now and put in place protections to guard against when that happens. Defensive action taken now may remove, or at least greatly reduce, the potential for claims against a trust later on. You are best to make your own provision for these events rather than have a court impose it upon you. As the old saying goes:
“Prevention is better than cure.”